Many of the largest brokerage houses of the country have felicitated themselves on their ability in some years to pay their entire expense from their interest account, leaving the stock commission account as "velvet," or clear net profit.

As previously stated, neither the broker nor the banker is responsible for this situation. The responsibility is national and is in the bank act which centralized reserves in New York and left only a call loan market for flexibility.

Of course, a great question in the financial world is as to what effect the withdrawal of bank reserves by the hundred millions from New York City may have upon the banking power of New York and its financial supremacy.

It should be clear from considerations already set forth that under the Act the financial profits of New York as of all other financial centers must be expanded rather than diminished.

The advantage of the re-discount privilege with the Federal Reserve Bank may prove greater than the loss by bank deposits. New York banks will get a higher rate of interest on their call loans and can move with greater confidence in financial transactions with the knowledge that at any moment they can re-discount their commercial paper.

This constitutes for the New York bankers not only a stronger and safer, but more profitable line of secondary reserves, and combined with reduction in reserve requirements should fully compensate. for the loss on deposits from other banks.

There is also in the Act that which the banks themselves appear not yet to have realized the possibility of multiplying their financial power and resources by adopting the Continental system of time deposits, which system is just as applicable to New York banks as to European banks.

One of the great advantages the trust companies have had over the national banks is that they could pay 3%, and sometimes a fraction more, for time deposits, as the state laws call for no reserves against these.

Now, the national banks of New York will be on a much surer footing in competition with the trust companies.

They not only have their reserve requirements reduced more nearly to the requirements of the trust companies, but they can compete for time deposits, and they may apply, under Section II., Paragraph K, for permission "to act as trustee, executor, administrator, or registrar of stock and bonds."

Large national banks are preparing to apply for this permission. Competition between national banks and trust companies will be keener hereafter.

The trust companies and state banks are already before the legislatures asking reduction in their reserve requirements and expansion of their powers.

When it comes to state and national governments competing to reduce bank reserves and expand bank powers, who can foretell all the results?

There will certainly be money enough to go around and New York will have facilities for all the banking business that it now does, and likewise facilities for many years of growth and expansion.

The purpose of the Act will be carried out likewise in the upbuilding of other financial centers. Boston, Philadelphia and other cities, and possibly towns, will call home part of the reserves they now keep in Reserve and Central Reserve cities and will stimulate local enterprise with local borrowings at fair rates, confident that in time of stress they will have "eligible paper" for re-discount with their Federal Reserve Bank; and this directly, without the intervention of any Reserve City or any Central Reserve City bank.

It is not believed that there will be competition, at least in the East, between savings banks and national banks, but in the West, where the national banks have to a larger extent established savings departments, the growth of savings may be with national banks rather than by any expansion in the number of independent savings institutions.

Although the Reichsbank has 495 branches throughout Germany, it is not believed the Federal Reserve system will call for the establishment of anything like this number of branch banks in this country.

But branch banks may ultimately be set up to the number of clearing house centers, of which there are at present 162.

The primary estimate for branch banks is a possible hundred. When the Federal Reserve Act was passing through Congress many changes were suggested in the various forms of our national

currency.

The answer to all these suggestions was: 'When we get the bank bill through we will take up as another measure the amalgamation or unifying of our varying forms of currency."

It is not believed, however, that Washington or the country will care for any further financial debate, at least until the Federal Reserve Act is in extended operation and well beyond all the experimental stages.

Therefore, no immediate additional financial legislation need be looked for soon, except as the new Federal Reserve Board may apply for some slight amendment to this latest bank act.

XXVII

SEVEN POSSIBLE INFLATIONS.

The problem of inflation-proper and improper under the new bank act presents so vast a field of possibilities that it can be touched only in outline.

The first inflation has already been felt throughout the civilized world. It is the proper inflation of confidence begotten of the fact that American bank reserves, the United States Treasury reserves, and the nearly two billion of gold in the United States are to be unshackled under the new bank act for the commerce and finance of the world.

The benefits of this expansion are withheld from American industry by the refusal of the Washington authorities to give credit to the greatest customer of industry-transportation.

When once the railroads of this country are unleashed, no man can measure the proper expansion that will be given to legitimate industry and commerce from something expressed by the sole word— confidence.

The president of a New York bank, ranking as one of the strongest, but not one of the largest or oldest, says: "My bank has three million dollars gold in its vault but since 1907 I have either gone to sleep, or awakened, or been awake every night with a reflection for a minute or so as to what would be the result in my bank if somebody shied a brick through the window of its general credit.

"With any lack of confidence in my bank its three million gold would flow out in a few hours and any call for re-discount or financial assistance might forever end the progress or career of the bank.

"The moment this Federal Reserve Act goes into effect I shall sleep more soundly. I shall not have watchful eye on that three million gold. I shall have only to watch the character of my mercantile discounts and thereby feel reasonably sure that nobody can shy a brick through my credit window, for my loans can through the Federal Reserve Bank command the cash to pay every depositor on demand. If I have bonds in my reserves I can sell them in a market without every other bank competing with me in the sale."

The second inflation, and this is the beginning of danger, is

when the new system is inaugurated and the cash reserve requirements drop by the sum of 260 millions.

If the system is inaugurated in the late spring or early summer and its effect has not been previously unduly anticipated, there should be a second outpouring of money for bond investments.

If the inauguration of the system is postponed until fall it will be within the power of the Treasury by withholding its moneys from the banks to advance the money rate and curb any investment fever.

The third form of inflation may come through the transfer of demand deposits into deposits on time, or as defined by the Act, "payable after 30 days." As previously noted, more than half the deposits of European banks are time deposits with graduated rates of interest.

It is a little strange that, with no reserve requirements for timedeposits in trust companies, there has not grown up a more extended system of credits based on time deposits.

But in the forthcoming sharp competition, between state banks, or trust companies, and national banks, time deposits are pretty sure to steadily gain at the expense of demand deposits, thereby cutting the reserve requirements so that in effect banks throughout the country will hereafter require no more cash than they themselves consider necessary to promptly meet their daily needs.

In effect, with the transfer to time deposits there is not only the elimination of all fixed reserves but the practical abandonment of cash in reserve in the bank. The real reserve is with the Federal reserve banks, and the necessity therefore doubly obtains for their carrying the very largest reserves and inaugurating the new system with no primary efforts at money-making.

This

It is within the power of the secretary of the treasury to hold his hand firmly on the fourth power of expansion in the Reserve Act, to wit: the deposit of the United States Treasury reserve moneys which may range anywhere from 150 to above 200 million dollars. money properly belongs in the banks. It is the people's money, improperly withheld from bank and pocket circulation, but its sudden. restoration would be just as much expansion or inflation as would be a sudden import of gold by the hundred million or the creation of additional currency.

The fifth power of inflation may be found in the extension of credits outside the banking field through "acceptances," and this may have a very steadying influence.

If banking concerns, with sufficient capital, are established in this country to make commercial acceptances liquid in an open mar

ket, in conjunction with the acceptance allowed in commercial transactions under the new bank act, there may be a very broad bill market in this country inviting investment moneys. As explained in a previous article, this is not the American system and it is not yet clear that outside acceptance and discount markets inviting either home or foreign investment capital can be readily set up here. But the possibility is clearly encouraged by the Act broadening bank investments into the exchange and acceptance market.

Indeed the Act is so broad in this respect that Federal Reserve Bank moneys may yet carry millions in stocks and bonds although. they cannot do this directly for member banks.

To be useful the federal banking system must be put into the outside foreign exchange and acceptance markets and then in times of need it can call in this money without disturbance to the home markets. This is one of the great elements of value in the coming financial system. It is designed to make easier international exchange, which means freer flow of capital between countries.

In the purchase of some forms of exchange no limitation can be set up as respects bankers' bills whether they are based on wheat or bonds.

Certainly if Morgan sells 10 million of Southern Railway bonds in London his draft for the money should be good international exchange. What is the difference, so far as the exchange market is concerned, if another New York banker borrows 10 millions in London against bonds? Both are mere transfers of money, so far as the reserve bank is concerned.

What, therefore, is to prevent the loan of London money in New York on stocks and bonds when the rate is attractive?

The reserve bank assisting in the transfer of money thereby facilitates the loan and indirectly must give support to financial transactions upon stocks and bonds.

The broadening of our market in the international field will not only beget confidence in American securities and loans, but will tend to the leveling up of money throughout the world.

If a local acceptance market is set up in America, this likewise will tend to the leveling up of money between centers.

Where, for instance in New England, money is habitually borrowed in anticipation of taxes on city and town notes from local funds and at very low rates of interest, the rate will be higher as the opportunities for investment are broadened.

A holder of surplus funds who does not wish to buy stocks or bonds and is not familiar with mercantile notes has only a very narrow market for funds. He will buy town notes in anticipation